Daily Newsletter, Thursday, 2/24/2011

Table of Contents

Market Wrap

Be Careful What You Wish For

by Jim Brown

Bulls had been wishing for a decent dip for several weeks in order to remove some of the froth in the market and provide a better buying opportunity. Their wish came true and now they don't know what to do.

Market Statistics

It is just like a dog chasing a car. Once the dog catches the car they don't know what to do and that is when the most danger exists as they run alongside the speeding vehicle. The bulls wanted a 2-3 day dip to buy but the dip is now three days old and there is very little evidence the bulls are taking action. The hourly rumors continue to roil the market and the soaring price of oil has soured sentiment on fears of a return to a recession. The bears have found a renewed voice and warnings of a new bear market ahead are frightening to some. What is an investor to do?

I will try to make this short and precise. Some readers claim we are not specific enough in our writing.

First, bull market corrections are NORMALLY short, sharp and scary. If there were no fear there would be no selling. By spreading fear the bears are talking the market lower in an attempt to profit from their positions.

Second, markets ALWAYS over react. Regardless of the event, bullish or bearish, the markets always over react. They always move higher or lower than expected.

Third, nothing has changed in the economic recovery. The reasons to be long the market have not changed. If you liked the outlook for stocks last week you should like them even better at -4% lower today.

Fourth, the rising fear factor is actually bullish because it will cause many investors to wait on the sidelines for several days until they are sure it is moving up again and they will end up chasing prices higher when they realize their mistake.

Any questions?

Ignored in the panic over Libya today was the heavy calendar of bullish economic reports. The weekly jobless claims moved back under 400,000 with a reading of 391,000 today. That is the second lowest number in the last two years. That was a decline of -22,000 from last week. The trend is finally moving in the right direction now that winter weather is easing.

The Kansas Fed Manufacturing Survey spiked to an all time high of 19 in February from 11 in January. The components posted some major gains. New orders rose to 28 from zero in January. That was the second largest increase on record. Backorders rose from 2 to 8 and production spiked from 11 to 23.

Kansas Fed Manufacturing Survey

Durable goods orders for January spiked strongly by +2.7% after a -0.4% decline in December. However, the key component pushing orders higher was transportation equipment (planes, rail cars) and ex-transportation orders actually declined -3.6%. The post holiday period is normally weak and estimates called for a -2.7% decline. This report should not be seen as a negative event. This is a seasonal cycle.

Reports due out for Friday include the GDP revision for Q4 and the final reading on February Consumer Sentiment.

In stock news Priceline.com (PCLN) rallied +8% or +$36 to $462 after reporting earnings on Wednesday night and raising their outlook. Earnings were $3.40 compared to estimates for $3.02. The big spike in the stock came from a comment from Priceline that bookings could rise +50%. That $36 spike just took it back to the highs from last week after three very bad days of losses. Analysts at RBC Capital and Caris & Company boosted their price targets to $525 and $565 respectively.

Chart of Priceline

SalesForce.com reported earnings after the bell of 31 cents compared to estimates of 26 cents. Revenue was also higher. CRM raised its full year forecast to a midrange of $2.04 billion from $1.98 billion. SalesForce.com added 5,100 new customers for the quarter to raise their total to 92,300 and a +27% increase from a year ago. Sales rose +29%. He stock had a heavy short interest and those shorts were squeezed after the close when CRM spiked more than $10 to $146.

SalesForce.com Chart

AIG spiked $2 after the close when they reported an $11.2 billion profit for the quarter. Unfortunately that came on asset sales and not new business. They had a $16 billion net gain on asset sales meaning they actually lost $4.8 billion for the quarter or -$2.21 billion on an operating basis. Most of that was on increased charges for rising liabilities on asbestos claims and writedowns of other assets. The stock gave back most of its gains after the full details were released.

Sears (SHLD) dropped -5% to $82.40 after a -13% earni8ngs decline. Sales in Sears branded stores fell but was partially offset by an increase in sales at Kmart stores.

Target (TGT) rallied nearly $2 after an 11% rise in earnings. Kohls (KSS) also gained +2% despite lowered guidance. The catalyst was the announcement of their first ever dividend and announced a stock buyback program.

How could any gold miner lose money with gold at $1400? Newmont Mining fell -7% despite a 46% rise in profits because costs also rose and production fell. The company also predicted lower production in 2011. Just as prices for gold are nearing their highs again their production begins to decline. That is some bad luck BUT I am sure anyone reading this would be thrilled to have any production at $1400 an ounce.

Newmont Chart

Just when the market needed something else to worry about Philly Fed President Charles Plosser said the Fed should end QE2 now in order to limit future inflation pressures. Plosser said continued stronger economics would force him to lobby the FOMC to end the QE2 program now and not wait for June. He said the rising inflation expectations should be a warning to take our foot (Fed's) off the accelerator. Dallas Fed president Richard Fisher is also expected to vote against continuing QE2. Plosser said the Fed promised to review the need for QE2 on a regular basis and he takes that promise seriously. He is expecting 2% inflation by next year. The next Fed meeting is March 15th.

This means institutional investors and hedge funds will be looking for a change in language at the March meeting and they would take that as a signal to begin dumping stocks before the Fed raises rates. However, just because the Fed "might" change the language in the March announcement it does not mean QE2 is dead or they are going to raise rates in the foreseeable future. It will take several months, probably a minimum of six or more, for the Fed to go through the process to change the bias, soak up some of the excess money supply and then begin to telegraph a rate hike.

In this economy, even though it is improving, I seriously doubt the Fed is going to change direction. With the government budget undergoing surgery by chainsaw and the cuts expected to reduce GDP by -1% and with oil prices at $100 creating a drag on consumers and with unemployment still over 9% I don't see the Fed acting quickly.

However, what I see is immaterial. Perception is reality for hedge funds and institutions. Once they perceive the slightest shift in bias they will begin to lighten up. Not with triple digit losses but with a trickle of sales that will eventually turn into a torrent the closer we get to a Fed change. We need to continue to pay close attention to this change and be ready to go with the flow.

The biggest news for the day was of course the roller coaster ride on oil prices. Early this morning an analyst at Nomura Securities predicted oil prices could rise to $220 if Libya and Algeria both saw oil production come to a halt. Libyan production has already declined -80% due to the shutdown of major fields and the exit of the country by the employees of the major oil firms like ENI, RDS, OXY, TOT, MRO and BP.

I wrote a long analysis of this bogus market call for OilSlick readers at 5:AM this morning so I won't repeat it here but basically it was unfounded. It was only a matter of time before Saudi would claim, as they did today, that they were ready to produce as much oil as needed to cover the shortage. The IEA also said they were ready to release supplies from the 1.6 billion barrels in reserve storage for just such an event as this.

Almost immediately the price began to fall and declined more than $10 at the low of the day. The WTI rallied from $99 to more than $103 but collapsed back to $95.60 late this afternoon.

The rumor that Qadaafi had been shot and killed accelerated prices to the downside but the rumor was premature.

Brent Crude Chart

The Libyan rumors controlled the market today. The market was recovering this morning until the former Libyan Justice Minister said Qadaafi had chemical weapons and would use them. His comments caused the market to lose traction around 11:30 and move to the lows of the day. The minister said Qadaafi planned to go out like Hitler and cause as much damage as he could before he gives up. The rumor he had been killed rallied the markets off the lows and pushed the Nasdaq and S&P back to positive territory but the Dow remained a laggard thanks to XOM, HPQ and WMT.

In another speech today Qadaafi blamed the riots on Osama Bin Laden and hallucinogenic drugs. I think he is the one on drugs if he thinks he can come back from this loss of what little credibility he had. Libya has 140 tribes but only 12-15 are important. Qadaafi belongs to the Qadadfa tribe. This is the tribe that controlled 99% of Libya's resources including oil production. Rather than fracturing as many expected it appears the tribes have banded together and now control up to 80% of the country according to some reports. The Swiss Government reported today they have frozen his assets and several other nations are also moving to deprive him of resources. Reports of his death may have been premature but most believe they will still be accurate.

All of this uncertainty is a witches brew for the markets. Markets hate uncertainty and when you think about it that is all we have right now. Uncertainty about Libya, Saudi Arabia, the economy, the Fed, oil prices, etc. It could take weeks to overcome the lingering uncertainty over Libya unless Qadaafi suddenly departs in one-way or another.

Uncertainty over Saudi Arabia following Algeria, Egypt, Tunisia and Libya into a downward cycle of demonstrations, protests and riots was eased over the last 24 hours after King Abdullah returned to the country after three months of medical treatment in the U.S. and Morocco. He was treated to a royal welcome home and he added to the joy with a $37 billion stimulus package that literally had the young people dancing in the streets. The scheduled March 11th "day of rage" demonstration has lost some supporters and analysts now believe it will have little impact. This is very good for lower oil prices because it takes some risk out of the market.

The S&P declined to support at 1300 at noon and languished there for an hour before a sell program punched through that support for about 30 minutes to tag 1294 as the low. The rebound on the dead dictator rumor returned it to 1310 but end of day forced margin selling took off a few points before the close.

For all practical purposes support at 1300 held. We have had three days of declines and both dips to 1300 have been bought although without conviction. The bearish sentiment erupting in the news has kept the dip buyers at bay. Projections for a -10% correction to 1209 are scary since that is another -100 point drop on the S&P.

As I pointed out earlier nothing has really changed in the market or the economy that pushed the market to new highs last week. This is a news driven correction and we are past the 72-hour window where repetitive news like Libya begins to be ignored. Can the market move lower? Heck yes but it can also move higher. I believe Friday will be a tossup because investors may not want to be long over the weekend. Actually shorts may not want to be short either because the confirmed announcement of a dictator's sudden death could produce a monster gap higher on Monday. That means Friday is a toss up for direction. I believe the bottom is in but without knowing the outcome in Libya we can't say that for sure. As you will see when you get to the Russell comments that index is very persuasive. If 1300 does break then the next major support level is 1275-1280.

S&P Chart

The Dow rebounded off round number support at 12,000 and closed about +90 points off its lows. This would be an ideal place for the Dow to bottom during this bout of profit taking but that would probably be too simple. The Dow was seriously over extended and even with the -400 point drop that is a minor move. I prefer not to make any judgments on the Dow today in favor of the Russell as an indicator instead.

Dow Chart

The Nasdaq rebounded +30 points off its lows and that was without any help from Google or Apple. While I view that as encouraging I am far from convinced there is not a move to 2675 still lurking in our future. I don't know what excuse traders will use to take it there but the possibility exists. I like the rebound on the Nasdaq but there was still a lack of conviction.

Nasdaq Chart

The Russell honored support at 800 on both days. There were repeated attempts to punch lower and each one was immediately bought. The 50-day average at 796 is an added support and this would be the perfect spot for a rally to begin. Remember, market weakness is usually hardest on small caps. They lead on the way up and lead on the way down. They are leading now by not going lower. They are stubbornly refusing to move below 800 and the 50-day.

Nothing is guaranteed. That support at the 50 could evaporate like the morning dew on Friday and collapse back to 780 but I believe it would take a new headline to make that happen. I am "cautiously" optimistic on the Russell.

Russell Chart

In summary I believe that over the next two to three weeks the market should rebound and produce profits for those dip buyers who braved the unknown. Once past the Libya crisis the next major pothole is the FOMC meeting on the 15th. ANY change in the statement to indicate the slightest deviation in the QE2 plan would be market negative.

Longer term the high oil prices are going to slow the recovery and make it very hard for the Fed to raise rates. They are stuck between the proverbial rock and a hard place with inflation beginning to appear but oil, dollar and unemployment preventing them from changing their strategy. An old word is beginning to reappear in economic commentaries. That is stagflation. That is low growth coupled with rising inflation and according to Greenspan this is more insidious than any normal inflation cycle because normal FOMC tools to fight inflation cannot be used. The Fed is in trouble and this will eventually translate into a weaker market but I think it is still months away. Hedge funds anticipating this Fed problem will be our next challenge.

New Option Plays

Our Advantage

by James Brown

In addition to the new candidates listed tonight there were several stocks that caught my eye as potential bullish candidates. You may want to check them out or put them on your watch list. These are: ESI, CMG, DECK, AAPL, and AMGN.

On AAPL a move past $345.50 or $346.00 might be a bullish entry point. Meanwhile the trend in AMGN looks absolutely terrible but if it's going to see an oversold bounce then the $50 zone is where we should look.

Why We Like It:
Two days in a row traders bought the dip at $74.00. This looks like short-term support and we want to take advantage of the recent sell-off. Buy call positions now with a stop loss at $73.75. Our targets are $79.75 and $84.50. I'm suggesting we start this trade with small positions to limit our risk.

Open SMALL bullish positions now at current levels.

- Suggested Positions -

Buy the March $80 calls (BWA1119C80) current ask $1.10

- or -

Buy the April $80 calls (BWA1116D80) current ask $2.25

Annotated Chart:

Entry on February 25th at $ xx.xx
Earnings Date 04/28/11 (unconfirmed)
Average Daily Volume = 2.3 million
Listed on February 24th, 2010

Why We Like It:
I consider this play somewhat aggressive. FFIV can be a very volatile stock and shares already produced a $5 bounce on Thursday. The 50-dma might be overhead resistance but shares managed to rally toward prior support and new resistance near $130 last time FFIV saw an oversold bounce. If we're lucky FFIV might see some minor profit taking tomorrow. I am suggesting new positions now but you might want to wait and cross your fingers hoping for a dip near $115 or $114. The recent lows were near $110. Our target is $129.00.

open SMALL bullish positions now at current levels

- Suggested Positions -

Buy the March $120 calls (FFIV1119C120) current ask $3.80

- or -

Buy the April $125 calls (FFIV1116D125) current ask $4.70

Annotated Chart:

Entry on February 25th at $ xx.xx
Earnings Date 04/20/11 (unconfirmed)
Average Daily Volume = 3.7 million
Listed on February 24th, 2010

Why We Like It:
Broken resistance near $90 is acting as new support. We want to take advantage of the recent market weakness and buy calls on MMM now. Keep in mind that MMM does not move that fast. You may want to buy the April or May calls instead of the March calls.

open bullish positions now at current levels.

- Suggested Positions -

Buy the March $90 calls (MMM1119C90) current ask $1.77

- or -

Buy the April $95 calls (MMM1116D95) current ask $0.80

Annotated Chart:

Entry on February 25th at $ xx.xx
Earnings Date 04/27/11 (unconfirmed)
Average Daily Volume = 3.5 million
Listed on February 24th, 2010

Comments:
02/24 update:
BTU traded in a $2.00 range essentially fluctuating on either side of its 50-dma. I still see this pull back as a chance to buy calls on the dip but more conservative traders may want to wait for a new close over the $65.00 level.
Our first exit target is $69.75.

The Point & Figure chart for BTU is bullish with an $80 target.

- Suggested Positions -

Long the March $70 calls (BTU1119C70) Entry @ $1.07

- or -

Long the June $70 calls (BTU1118F70) Entry @ $3.60

Entry on February 17th at $66.30
Earnings Date 04/21/11 (unconfirmed)
Average Daily Volume = 4.6 million
Listed on February 16th, 2010

Comments:
02/24 update:
CAT did not see a lot of change on Thursday. Shares were hovering near the $100 level and the bottom of its bullish channel. I see this dip near $100 as an entry point to buy calls.

Comments:
02/24 update: The early afternoon decline in FAST gave us a bit of a scare when shares traded under their 50-dma. Fortunately, traders bought the dip near round-number support at $60.00. The last couple of days I have been suggesting readers buy calls on a dip in the $61-60 zone. Today's action is no different. I would use it as a bullish entry point. We're going to double down in the newsletter and add to positions here. We will keep the stop loss at $59.90 (changed on 2/22).

Readers may want to keep in mind that the most recent data listed short interest at 11.4% of the 132 million-share float.

Comments:
02/24 update: Traders bought the dip in NKE near $85.50 and its 50-dma. This intraday bounce looks like an entry point to buy calls. More conservative traders might be tempted to raise their stops closer to the $85 level.

I am suggesting we take advantage of this entry point and add to positions (see below).

Comments:
02/24 update: Oil stocks pulled back on a dip in crude oil prices. Shares of OXY gave up -1.1% and definitely look headed for a retest of the $100.00 level. We will adjust our trigger to open bullish positions from $101.00 to $100.25. We'll adjust our stop loss to $96.75.
If we are triggered at $101.00 our targets are $106.75 and $109.75.

Investors will want to take note that this is not without risk. OXY does a lot of oil and gas exploration across the U.S. and internationally. The company does do business in Bahrain and Yemen, which have been two hotspots for protests and violence in the last couple of weeks. You can see from the chart that headlines from these two countries really did not have an affect on OXY on the stock. Today's move lower appears to be a reaction to the market-wide event.

Trigger @ $100.25
- Suggested Positions -

Buy the March $105 calls (OXY1119C105) current ask $1.70

- or -

Buy the April $105 calls (OXY1116D105) current ask $3.20

Entry on February xxth at $ xx.xx
Earnings Date 04/28/11 (unconfirmed)
Average Daily Volume = 4.9 million
Listed on February 22nd, 2010

Comments:
02/24 update: The major banking indices closed in the red again but gains were mild. Meanwhile TD was outperforming on Thursday. Shares gapped open higher and hit $81.80 intraday before trimming its gains. I'm not convinced the correction is over yet so readers may want to wait for a dip near $78.00 before initiating new positions.
Our targets are $84 and $89. We will plan to exit ahead of the early March earnings report (unconfirmed date).

Comments:
02/24 update:
Traders bought the dip near the 50-dma on both the UWM and IWM for the second day in a row. This is a new bullish entry point for us to open positions. The newsletter is adding new strikes and positions to take advantage of the pull back.

Comments:
02/24 update: The VIX spiked toward its 200-dma and failed on Thursday. If the stock market bounces from current levels (near support) the VIX could collapse pretty quickly. Readers are encouraged to take profits now if you have not done so already.
I am not suggesting new positions at this time. Our final (and very speculative) exit target is 28.00.

- Suggested Positions -

Long the 2011 March $22.50 calls (VIX1116C22.5) Entry @ $1.60

02/23 1st Target Hit @ 22.50, Option @ 2.35 (+46.8%)

Entry on January 26th at $17.00
Earnings Date --/--/--
Average Daily Volume =
Listed on January 25th, 2010

Comments:
02/24 update: FCX is starting to see a little oversold bounce. Right now I'm waiting and watching for a failed rally in the $53-54 zone. Nimble traders could prepare now. I'm not quite ready to pull the trigger on this trade yet. Look for the 30-dma and 100-dma to be additional overhead resistance.

Trigger @ ??.??

- Suggested Positions -

Entry on February xxth at $ xx.xx
Earnings Date 04/21/11 (unconfirmed)
Average Daily Volume = 14.4 million
Listed on February 19th, 2010